In a speech to the Independent Community Bankers of America, Mr. Bernanke offered his most expansive thoughts on GSE legislation since taking the reins of the central bank in February 2006.

His predecessor, Alan Greenspan, argued forcefully for reducing Fannie's and Freddie's mortgage portfolios, but Mr. Bernanke took a different approach. The enterprises should be forced to anchor their portfolios "almost exclusively on holdings of mortgages or mortgage-backed securities that support affordable housing," he said.

Doing so would reduce their size while serving a valuable public service, Mr. Bernanke said.

"The key principle here is that the GSEs' senior debt -- which investors view as government-backed -- should be used only to finance assets (such as affordable-housing mortgages) that have, in the view of the Congress, a clear and measurable public benefit," the Fed chief said in prepared remarks.

As Fannie and Freddie's mortgage portfolios grew from $135 billion in 1990 to $1.56 trillion in 2003, Mr. Bernanke said, the GSEs' impact on affordable housing has been minimal.

"Evidence that Fannie and Freddie have had beneficial effects on the supply of affordable housing (over and above the benefits of their securitization activities for the mortgage market as a whole) has been difficult to find," he said.

Less than 30% of the GSEs' portfolios are oriented toward affordable housing, he said.

A compromise agreement between House Financial Services Committee Chairman Barney Frank and Treasury Secretary Henry Paulson would give a proposed new regulator flexibility to manage the companies' mortgage portfolios but would not tie them to affordable housing. …